April – a honeymoon on the gas market

The application of GEO 114, the plan to amend it, the intention to postpone it specifically establish, until today, a honeymoon for the Government of Romania – by keeping in April high revenues from VAT and for gas importers, which in absence of these measures probably wouldn’t have obtained any money in Romania this month. On Tuesday evening (March 27, 2019), a draft amendment to GEO 114/2019, with applicability within 4 days, was published on the website of the Ministry of Finance, providing that the provisions of GEO 114/2019, would be applied in terms of capping the price of gas from domestic production starting with April 1, 2019 to RON 68/MWh (action which in my opinion has an illegal foundation). Thus, gas suppliers quickly signed gas contracts, given the legal obligations in terms of a number of reports/nominations that had to be carried out 5 days before the end of the month, before the actual delivery – being subject to heavy fines – to ANRE (the Methodology for the implementation of GEO 114), to Transgaz (Network Code) etc.

Thus, suppliers were in a hurry to sign:

– termination of the contracts with the former gas suppliers, to be able to sign the contracts with gas producers according to GEO 114/2018,

– contracts for the acquisition of imported gas (according to my estimate the price at which imported gas was sold in April 2019 in Romania was higher by up to 30% compared to the price at which gas would have been sold in Romania in absence of GEO 114/2018 – details in the Gas Price Bulleting Vol. 6, Intelligent Energy Association)

– contracts with some end-customers, with price changes under these new contracts, in line with the new prices for the acquisition from domestic production and import.

Surprise! On March 28, 2019, another draft amendment to GEO 114/2018 was published, postponing the application of GEO 114 from April 1, 2019 to May 1, 2019.

The consequences of this measure:

Signing the gas acquisition contracts with producers at a price of RON 68/MWh starting with April 1, 2019 is hit but nullity, in conditions in which GEO will apply only as of May 1, 2019, as producers took care to provide that the price of the contract is the price established under GEO 114 and the contract is valid under the terms provided for by GEO 114. But if GEO 114 no longer applies as of April 1, 2019, it means that all contracts with producers are null and void. What does it mean? It means that suppliers have terminated contracts with other suppliers and they don’t have contracts with gas producers either. Meaning that they remain without gas sources. What does it also mean? It means that the old suppliers – which still have gas (they did not terminate the old contracts with producers) – will have to conclude new gas supply contracts with the suppliers that until yesterday had a gas supply contract, but at a different price. Thus, there is a possibility of speculation, determined by these pseudo-amendments, which will most likely end up in higher prices that suppliers will have to pay for gas purchased in April 2019. Moreover, there are situations in which suppliers have spent the acquisition money as they paid in advance 100% for gas they thought they had purchased from producers, remaining for the moment (until the money is returned) without cash.

Signing acquisition contracts for imported gas was not subject to GEO 114/2018, so they remain in force, and create obligations for suppliers to pay and take over the respective quantities. I believe in absence of GEO 114/2018, gas from domestic production was sufficient for the demand in April 2019. In its absence, probably the quantity purchased from import would have been low or zero. Thus, under GEO 114, an artificial demand was created, as well as an artificial increase in the price of imported gas.

III. Signing gas supply contracts with end-customers, under the terms of GEO 114, was not subject to GEO 114 either, and they must also be observed; thus, there are situations where some suppliers will register losses, following the postponement of the application of the ordinance from April 1st to May 1st.

This situation, artificially created:

does not bring any reduction in gas prices at the level of end-consumers

brings benefits for certain players and losses for other players on the gas market.

brings benefits to the state budget, as there is another month during which a high price of gas from domestic production will be used, which will determine in April the collection of a higher amount from VAT applied to gas companies.